Lend Lease grabs at its past glories

To understand today’s
Lend Lease
just visit company headquarters in Hickson Road, on the western fringe of Sydney’s CBD. You’ll find a modern, enviro-friendly nine-storey building embedded in a sandstone escarpment, with commanding views of Darling Harbour.

What lies between the water and the Lend Lease building provides a clue. It’s 22 hectares of flat macadam, an eerily empty space save for floodlights perched on top of high metal poles.

Over the next 10 to 15 years, Lend Lease plans to build 14 buildings on the southern part of that site, called Barangaroo, creating nearly half a million square metres of office, retail and residential space; plus a ferry terminal, canal, long pedestrian tunnel, walkways, green areas, and connections to new rail networks.

But it’s how Lend Lease is pursuing this $6 billion project that fleshes out its corporate persona. It has elbowed out the winning design and secured big, possibly $1 billion-plus, commitments from a Middle Eastern sovereign wealth fund and a large US pension fund as investors. And it has expressions of interest from 37 foreign and local companies wanting to lease, and, in some cases, eventually purchase, about 40 per cent of the planned new real estate.

It won crucial support for its plans from former Labor prime minister
Paul Keating
and at the same time negotiated some of these prospective investment deals at the height of the global finance crisis. This was before it had secured NSW government approval to go ahead with stage one of the development – an approval which is still pending. In fact, negotiations were going on between Lend Lease and potential investors-lessees in Europe, America, the Middle East, Asia, and, of course, Australia, one year before Lend Lease won provisional approval for its design.

And the Lend Lease-Barangaroo project faces further potential obstacles on another front. Councillors from three Sydney councils have joined a residents action group to mount an attempted court challenge to stop the project going ahead. They will be arguing issues ranging from the proposed relocation of ferry terminals to Lend Lease’s proposal to exceed official density and height ratios.

But the new Lend Lease, with new management and a new management structure, doesn’t muck around. Some call it chutzpah, others hint – privately of course – at undue influence. Asked if Lend Lease exerted any undue political influence to secure the Barangaroo project, the global head of development,
David Hutton
, replies: “Of course not," adding the NSW government “did not want us to engage with a lot of people. It was always about us putting our best foot forward."

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For
Steve McCann
, the boyish-looking 45-year-old chief executive, this style is integral to Lend Lease’s two-pronged ambition. This consists of profits plus corporate leadership. In the case of Barangaroo, corporate leadership means “we felt from day one that we were best placed" to execute this “very significant development for Australia".

In the case of profits, Lend Lease recently bettered market expectations, with a half-year operating profit of $187.9 million. Strong growth across the Asia-Pacific business, particularly in construction, outweighed a reduced contribution from the US and UK. Lend Lease now earns more than 60 per cent of its profit in Australia. McCann expects the full-year operating profit will be broadly in line with the $307.5 million achieved in 2009, excluding the cost of the recent capital raising.

A lawyer hailing from an investment banking background – “I probably bring something a bit different and therefore complementary to the organisation" – McCann sees himself as the CEO who oversees the money. He’s ensuring Lend Lease presses home its competitive advantage at a time when banks remain shy about funding smaller property developers, and Lend Lease can attract investors for projects before they begin.

According to Hutton, “There’s been a large convergence between the property markets and the capital markets. You can’t treat the two things separately. The only way Lend Lease can be very good at property is to have very good capital skills."

At the same time, McCann says “one of the biggest challenges facing a listed property developer" is how to handle pressure for short-term results. “It’s easy for companies to fall into that trap. We are not in that space."

Barangaroo looms large in that space. To comprehend the pivotal role it plays in hopefully repositioning the new Lend Lease it’s necessary to go back in time. In just under half a century as a listed entity, Lend Lease has ridden a corporate roller coaster from stand-out Australian icon to virtual pariah, wallowing in a stew of appalling investments and obsession with short-termism.

It’s an approach McCann now labels a disaster. According to Sydney stockbroker Charlie Aitken, “They lost their way trading apartments and property management and all that bullshit – too much deal-making."

Now through Barangaroo and new projects in Melbourne, Brisbane, Europe and Asia, totalling about $13 billion, Lend Lease is trying to rehabilitate itself. In the past few months it has raised more than $5 billion in new equity, outside project investment and debt.

Ben Byrne, from Nomura Securities, says Lend Lease has “got a pretty good pipeline for growth" although it has also taken on “an increasing level of financial risk, they seem to be funding it OK. Their credit spreads have tightened a long way," with a roughly 15-point differential with Westfield of 130 versus 115 points in the credit derivative swap market.

The company believes these new projects are being launched at the bottom of a post-GFC property cycle. Their pitch is they will surf a global property recovery wave that will return them to their past glory of big ideas, unparalleled execution skills, deep pockets and rich backers.

Will it succeed? Many in the market are sceptical, although Aitken says: “I would have to say yes but you have to see how they tick the boxes on the way. You can only form a judgment in 10 years’ time."

A generation ago, posing such a question would have seemed laughable. At its peak Lend Lease was, as Aitken says, “the dominant property company in Australia by a mile".

It was invented and moulded by a brilliant Dutch business maverick, Dick Dusseldorp, and reflected the many sides of this complex character – tough, at times ruthless, an unerring eye for a bargain, a tenacious negotiator and demanding with staff.

An earthy man with presence, he had big ideas and was brilliant in execution, attracting leading architects, clever builders, skilled tradesmen, and innovation in design and financing. Then he spread the fruits of these remarkable endeavours among employees and shareholders alike.

According to Lindie Clark (no relation), in her biography, Finding a Common Interest, Dusseldorp was a social capitalist, or, in the words of former colleague David Thorne, he was a “great capitalist when making profits and a great socialist when distributing them". He brought to projects like the Snowy Mountains Scheme, building of the Thredbo ski village, development of Canberra, Australia Square and Caltex House in Sydney, and stage one of the Sydney Opera House, an enlightened approach to industrial relations that contrasted with the industrial bitterness plaguing the building industry of the day.

In 1972, Dusseldorp agreed with the Australia Council of Trade Unions to allocate a set proportion of pre-tax profits to a bonus pool for pro rata distribution among workers. The following year he decreed shares be issued to all employees, who within five years became the company’s biggest shareholders.

Dusseldorp’s conceptual breakthrough occurred with the creation of the General Property Trust, the first listed property vehicle of its kind, and a cross-shareholding arrangement with MLC. Both moves made Lend Lease a more sophisticated property developer, lowered the cost of financing, and gave it more confidence in committing to major projects. Dusseldorp’s great coup took place in the early 1980s, when Lend Lease’s then largest individual investor, MLC, was staked out by corporate raider Ron Brierley. Using a partial bid followed by a share swap, Lend Lease gained control of what was then Australia’s fourth-largest insurer, with more than $2 billion in assets. He retired eight years later and died in 2000.

“Dusseldorp’s legacy is truly amazing and it isn’t something that I would be trying to aspire to," McCann says. In his eulogy at Dusseldorp’s memorial service in March 2000, John Morschel, a one-time Lend Lease chief executive and current chairman of ANZ Banking Group, described his mentor as a visionary and a giant.

“He had a great strategic mind. Not that all his strategies worked, but he always said you have to be tolerant of some failures in an organisation," Morschel recalled in a recent AFR interview.

But late in the 1990s and early noughties, long after Dusseldorp had left the company, Lend Lease lost its way. It sold off MLC to National Australia Bank for $4.6 billion in 2000 and rashly bought assets in the UK and US and even moved its head office to London.

When Greg Clarke was approached to be chief executive in 2002, he said the impression he got from the board was that while Lend Lease was “a great company, it really had got itself into trouble". How much became apparent when the sale of some loss-making businesses generated losses equivalent to one-quarter of its then market capitalisation.

Like a corporate prodigal son, Lend Lease came home.

The story of Lend Lease’s return soon became bound up in the intrigue surrounding Barangaroo, the most significant CBD redevelopment in Australia’s history.

For the company and city, the stakes could hardly be higher. For Lend Lease, Barangaroo is “make or break", in the words of stockbroker Charlie Aitken; for Australia’s international city, it represents the best chance to transform a chaotic CBD into a business, banking and professions powerhouse servicing the Asia-Pacific region.

Like the Sydney Opera House, Barangaroo faces north on Sydney Harbour, about 1.5 kilometres west of Australia’s global landmark. Now the site, which for decades hosted the harbour’s main container terminal, is vacant. A three-stage redevelopment, taking 10 to 15 years, is on the way, half park and half office buildings, hotels, apartments and shops.

Or maybe not. The vitriol and intrigue accompanying Barangaroo may spoil a once in a century opportunity.

Lend Lease has always viewed it as a must-do project, initiating discussions with the NSW Labor government eight years ago – four years before stevedoring company Patricks began vacating.

A two-stage design competition was won by Hill Thalis Architecture + Urban Projects, Paul Berkemeier Architects and Jane Irwin Landscape Architecture. But Lend Lease had two entries in the final five – one in-house proposal, and the other consisting of Lend Lease, the Australian firm of Lippmann Associates, the Richard Rogers Partnership from the UK and Martha Schwartz Partners from the US.

After months of jockeying involving the Sydney Harbour Foreshore Authority, the design panel and a special review panel chaired by Keating, the Lend Lease-Richard Rogers plan won through.

For Lend Lease, Barangaroo is the big one. But its recent winning streak in acquiring new projects also includes the $2.5 billion redevelopment of the Ekka showground in Brisbane, the £1.5 billion Elephant and Castle project in London; securing the $1.4 billion ING Retail Fund portfolio; and taking full control of the Lend Lease-Primelife retirement portfolio. “The company has real momentum and some of our competition is struggling. We have come to the forefront," Hutton says.

“We also play across the full value chain," Steve McCann says, including planning, financing, design, development, development management, construction, asset management and funds management.

Lend Lease is “one of the few operations" like that. So it can extract maximum value.

On the financing side, Hutton says Lend Lease is underwriting the whole project. “As we develop individual buildings we will bring capital in. Lend Lease will not be the owner of the buildings long term, but there will be substantial investment in Barangaroo in the next decade.

“It’s important for Barangaroo to become a vibrant part of the city. It needs a life that goes beyond office hours. It’s getting all those details right. It needs to be a project for all of Sydney."